International Finance Corporation, the World Bank’s private lending arm, has been an active investor in Indian firms catering to the economically weak.
IFC’s director for South Asia, Serge Devieux, told Raj Kumar Ray that the multilateral agency was willing to support firms that get banking licences. Incidentally, IFC has assisted IDFC and Bandhan in the past (it gave IDFC a loan and supported Bandhan with equity investments), the two niche players that got RBI’s in-principle approval to start banking operations, apart from other NBFCs and banks in the country. With an annual investment target of about $1 billion for India, Devieux advocated a series of capital market reforms to help the country attract more foreign capital.
Is IFC planning to invest more in Indian NBFCs and new banks?
Financial inclusion is the centrepiece of our work in India. We work with financial intermediaries, small and medium enterprises, non-banking finance companies, micro-finance companies and housing finance companies for low-income groups, both through investments and advisory offerings, to help our clients serve low-income rural, semi-urban and urban communities that are financially under-served.
A third of IFC’s exposure in India is in the financial sector, totaling over $1 billion. As an active investor in India’s financial sector, IFC evaluates all key opportunities in line with its strategy. We work towards providing debt facilities to existing portfolio clients to support asset growth. We also want to play an active role with financial institutions engaged in the distressed asset market. We will also support those who receive a banking licence and seek our help ? we see this as an extension of the financial inclusion agenda.
Apart from financial inclusion, IFC’s other strategic priorities in India are around infrastructure- building, promoting clean and sustainable private sector growth, and enhancing access to affordable and quality healthcare.
What’s your India investment plan for the next few years?
Globally, India makes for IFC?s largest country exposure with a committed portfolio of $5.3 billion as of December 31, 2013. In fiscal 2013, IFC invested $1.4 billion in debt and equity instruments in India ? particularly in low-income states ? to promote inclusive growth, help address climate change impact, and support inter-regional trade to boost growth of small businesses.
India is an important part of our investment strategy. Going forward, we expect to continue to invest approximately $1 billion a year here. This will of course depend on our being able to identify opportunities where IFC can play an important development role with appropriate impact and financial returns.
What makes India an attractive market for you? Are the returns here higher or lower than those from other emerging markets and developed nations?
India is a key market for IFC. We believe in its long-term fundamentals. We invest in projects that can achieve long-term sustainability and meet stakeholder expectations, apart from offering returns that are able to attract commercial capital on an ongoing basis. IFC looks at both developmental returns and financial returns.
Recent returns, especially on our equity portfolio, have proved challenging, particularly due to the devaluation of the rupee.
IFC?s initiatives in India’s low-income states are strategic to our goal of promoting inclusive growth. We are working closely with Rajasthan, Odisha and Bihar to improve their attractiveness for private investment.
What’s your outlook for the Indian economy and the banking sector?
India’s global economic stature will continue to grow. Its pace can be fast-tracked through progressive policy and by building a strong business sentiment. The Indian economy has stabilised in recent months after a couple of tough years. The key to macro-economic recovery hinges on investment revival.
Stronger economic performance in the US and Europe ? India?s key export markets ? is expected to support the growth momentum. Forward-looking government policy decisions will be key to reviving investment activity ? foreign and domestic ? and to ensure a sustained increase in the pace of economic expansion.
Indian banks continue to have sound liquidity metrics, underpinned by a sizeable domestic deposit base and minimal reliance on wholesale funding. The systemic support to the sector remains strong, such as the recent announcement of allocation of government funds to bolster capital at public sector banks. New banking sector reform measures announced by the RBI are likely to improve flexibility in the banking system and facilitate financial inclusion and penetration through expansion of point-of-sale terminals and mini-ATM usage.
What are the major hurdles to growth? What kind of reforms are needed?
The capital markets are an area where reforms would help create access to long-term and low-cost finance for key sectors such as microfinance, housing and infrastructure. Strengthening local corporate bond markets and providing long-term local currency financing and investment vehicles can lower financial sector risk, improve financial sector diversification, and keep funds flowing when banks are not appropriate or available for financing.
